Lloyd’s renews Central Fund cover, explores contingent capital for major losses

Having first secured an innovative cover with capital markets backing for its Central Fund back in 2021, the Lloyd’s market has renewed this in 2024 and this time the protection will run for a five-year term, while a chunk is again collateralised by a major investment bank.

Recall that, Lloyd’s secured an innovative cover for its Central Fund to provide it with a £650 million arrangement for five-years of annual aggregate reinsurance or retro protection.

Now, in having its rating upgraded by AM Best today, Lloyd’s has revealed a renewal of this novel protection, to run for five years from the renewal date, which was said to be earlier this year.

Today, AM Best revised its financial strength rating for the Lloyd’s marketplace to A+ (superior) from A (excellent) and the long term issuer credit rating to ‘AA-’ (superior) outlook stable from ‘A+’ (excellent); outlook positive.

Burkhard Keese, Lloyd’s CFO, commented, “Today’s upgrade from AM Best follows that of S&P Global at the end of last year, with both agencies acknowledging the strength and resilience of Lloyd’s balance sheet, its strong operating performance and its position as the leading global specialty insurance and reinsurance market.”

Keese also referred to the Central Fund cover renewal and plans for additional downside protection for Lloyd’s market and its members.

“Capital management continues to be Lloyd’s focus to ensure the attractiveness of the Lloyd’s market for our customers, participants and investors,” Keese explained.

He added that, “Our financial strength and solid capital platform enable us to deliver on our strategic growth ambitions and explore new and innovative solutions to enhance the fungibility of capital for our members.”

Further stating, “We were able to renew the central fund insurance early this year and are currently exploring a post major market loss contingent capital solution for eligible members.”

As with the original 2021 Central Fund cover, the 2024 renewal provides similar protection.

To be triggered, the cover would reimburse the Central Fund after aggregate losses in excess of $1 billion.

The renewal has been underwritten by a panel of the world’s largest reinsurance companies and again involves a collateralised portion transacted via a risk transformation company financed by a leading investment bank.

In 2021, as we reported at the time, the lower £450 million layer of the Central Fund cover was fully collateralised and was transacted using a cell structure that had been 100% financed by investment bank JP Morgan, with no direct participation from third-party investors or ILS funds.

We understand much the same arrangement is in place today and believe it’s likely the same investment bank is behind the protection.

The 2021 deal was transacted using a Guernsey cell of Aon Insurance Manager’s White Rock structure. it’s not clear if the 2024 renewal uses the same, or whether it could have been transacted using a cell of London Bridge, Lloyd’s ILS structure.

Lloyd’s said on the renewal, “This protection enhances the financial strength of the Lloyd’s balance sheet from severe loss events with a remote probability of occurrence. This is a 5 year contract, however the recent renewal demonstrates that it can be considered as a longer-term solution.”

On the contingent capital arrangement being explored, Lloyd’s said this would be, “a new senior debt financing arrangement that converts to qualifying solvency capital following a major market loss event.

“This potential new innovative product will enhance the fungibility of solvency capital for eligible Lloyd’s members following a major market loss and provide further enhancement to the Lloyd’s balance sheet.”